Monday 14 November 2016

CHAIRMAN'S MESSAGE - Sean Edwards, ITFA Chairman / Head of Legal at SMBC

Dear Members and Friends,

My nine-year old son is very fond of a collection of books entitled “A Series of Unfortunate Events”. This is an apt description of the two big political events that have hit the trade finance market this year: Brexit and the Trump victory in the US presidential elections. But let’s not be too pessimistic; these are unfortunate rather than death-dealing, planet-exterminating events. Short-term indices and measures have held up relatively well although some might say this is placing a premium on the absence of an immediate descent into darkness. The risks to the UK economy because of Brexit have been well rehearsed but this is maybe more of a domestic than an international problem. The bullying of the trade community in the presidential campaign is more worrisome. Both candidates have criticised free trade agreements with Mrs. Clinton performing a volte-face on her position such was the US electorate’s antipathy to liberalising trade. Mr. Trump never wavered in his opposition to TPP and TTIP and his nationalist, protectionist noises appear to presage even greater threats to global trade as the US builds an even bigger wall to the rest of the world than the one planned with Mexico. But on Brexit, the need and desire to protect the UK’s trade position with Europe is well understood and will be fought very hard for. As for Mr. Trump, his vaunted commercial pragmatism may yet contradict some of the gloomier predictions. What if the calculation is that the US does benefit from free-ish trade? And what if his promised expansionist fiscal policies produce opportunities not just for the American blue-collar workers but for industry (and their workers) in the rest of the world? There will certainly be opportunities, although these may be harder to spot than before and require even more invention and creativity. But who’s better at that than you, our members?

These “unfortunate events” are a fitting background against which to launch what we anticipate will be a regular feature in this newsletter: our ‘Chart of the Month” contributed by Dr. Rebecca Harding of Equant Analytics. Attendees of our Warsaw conference will remember her impressive opening presentation. This month: “Why do Trade Finance Professionals need to worry about the price of Oil?’’
In other news, may I remind you that with the Christmas season just around the corner, the ITFA Board is pleased to invite ITFA members to attend our yearly seasonal gathering; the ITFA Christmas Cocktail Party. As previously communicated, we kindly ask all ITFA Main Delegates to RSVP by latest 25 November 2016 (the invite is for a maximum of 5 delegates per member institution). The event is being held at The Victorian Bath House, Bishopsgate, London on Monday 5th December 2016 at 18:30 hrs. To view the invite please click here. As always, we encourage our ITFA members to attend this valuable networking opportunity, so please…save the date (and don’t miss the unlimited bar)!

May we also take the opportunity, to inform ITFA members about the ITFA Insurance Presentation which will be delivered directly before the Christmas party. Admission to the presentation is at 15:30 hrs and will be held at Liberty Specialty Markets, 20 Fenchurch Street, London. Please RSVP by 25 November 2016.

In addition to our new feature, this edition of the Muse features an article by Robert Kowit of Federated Investors, on ‘’Trade Finance as a Financial Asset: Risks and Mitigants for non-bank Investors’’. Finally, we present a write-up following the ITFA SERC event held in Verona, Italy at the end of last month.

We look forward to hearing from you with any feedback you may want to share with us by sending an email to myself, any of the Board Members or to our general email,  

Best wishes,

Sean Edwards

Wednesday 2 November 2016

TRADE FINANCE AS A FINANCIAL ASSET: RISKS AND MITIGANTS FOR NON-BANK INVESTORS - by Robert Kowit, Federated Investors, Senior VP - Product Specialist

Global trade volume in 2014 was estimated at USD 18 trillion. According to the WTO 80-90% of that volume requires some form of financing. Trade finance plays a critical role in the international finance and in the domestic finance of both advanced and developing economies.

Traditionally the financing of global trade has been provided by commercial banks around the world. Over many years and in some cases many centuries, these banks had developed effective and adaptive risk management procedures that allowed them to lend to developing economies which often faced significant headline risks. Now with balance sheets constrained, banks can be hard pressed to meet the demand for financing especially in the developing world.

According to a survey by the Asian Development Bank in 2014 as much as USD 1.6 trillion of demand for trade finance was unmet with a significant amount of the shortfall residing in Asia and Africa.

Financial investors who cumulatively control well over USD 100 trillion in assets worldwide have been largely absent from the market. The worlds of commercial banking and financial investment management have remained essentially invisible to each other.

The mechanics of more structured trade finance facilities present formidable barriers for financial investors, and although the trade finance market is huge it is also fragmented with few sources of comprehensive data.

The high risk adjusted returns from trade finance, especially those domiciled in developing economies, deliver a return profile that is very competitive when compared to financial assets while maintaining low to negative correlations with the major equity and fixed income indexes.

It is for this reason that Federated have been successfully investing in trade finance assets since 2006 and currently manage approximately half a billion USD. Their trade finance strategy is based on the credit culture of Federated. They analyze each deal to identify the risks embedded in the transaction and the structural elements which mitigate those risks to an acceptable level. For example, in the course of a given year Federated might see 600-800 discrete deals and make investments in only 80-100 of those.

So what are the risks that might adversely impact performance of a transaction? They can be broadly categorized into credit risk, market risk, liquidity risk, and operational risk. 

Risk Management

Credit Risk

Credit risk is the risk that the counterparty to a deal is unable or unwilling to make good on its payment obligations. Traditional credit risk analysis is focused on assessing a counterparty’s ability and willingness to make financial payment at a future date.

Structured trade finance deals, however, are often also dependent on production risk. This is the risk that the minerals cannot be mined, the oil cannot be pumped, or the crops cannot be grown. Once the goods are produced they can serve as the collateral for the transaction and in turn the risks involved in the deal are significantly reduced.

The success of trade finance deals depends on the actual production of the physical commodity underlying the transaction. The ability and willingness of a counterparty to successfully produce this commodity is often treated distinctly from performance risk.

In general, credit risk analysis often begins with a macro-level assessment of the country risk associated with the transaction. Sovereign credit ratings from the major rating agencies are reviewed along with independent and internal country credit and economic analysis. A similar sector-level risk analysis can also be performed where the current state and outlook for the relevant industrial sectors are examined. The relative importance to a sovereign of a particular industry sector or, in some cases, individual firms can also be taken into consideration in order to estimate the level of implicit support that might exist for an obligor or market.

Establishing limits is one way to manage credit risk as well as to encourage diversification, such as in Federated’s Project and Trade Finance investment strategy. In this particular case, there are geographical limits on the percentage of the overall strategy that can be invested in any one of four regions. Investments are also subject to per-country limits that depend on the specific sovereign rating of the country. Limits are also placed on the underlying transaction security types to further enhance credit risk protection.

To measure and manage performance risk, Federated begins with S&P Capital IQ ratings, a review of independent technical reports and credit analysis, and in-depth Q&A (questions and answers) on the credit with the mandated lead arranger (MLA) credit team. The MLA will also liaise with the agent bank (usually a wholly owned subsidiary operating in the country in which the deal is originated) which is responsible for monitoring the deal locally and for the control of the collateral pledged to the transaction.

Further research on the performance of the deals which the MLA has originated in the past and how the bank has dealt with stressed situations, can also be performed. If the banks investing in the deals provide stress scenarios, these are used as baselines and stressed further where deemed appropriate.

Once an investment has been made real time follow up is important. The agent bank provides direct information to investors on the performance of each transaction. This information would include confirmation on the production status of the goods, the transfers of money, collateral monitoring, and delivery schedules. 

Market risk

Market risk is the risk that changes in market factors that can adversely affect the value of a transaction. Most international fixed income bond funds are exposed to two primary types of market risk - interest rate risk and foreign exchange risk. Interest rate risk is primarily the risk that rising interest rates will reduce the present value of future interest and principal payments, while foreign exchange risk is related to the possibility that an adverse change in foreign exchange rates can reduce the value of those payments when they are translated back into the base currency of the fund. In the case of trade finance, it is possible to reduce market risk exposure greatly due to the structure of many of the deals.

As trade finance is dominated by short-maturity, floating-rate commitments, direct interest rate risk is inherently low. The impact of changing interest is minimal given that deals are floating rate indexed to either one month or three months.

Foreign exchange risk is minimal as virtually all elements of the transactions invested in are denominated in US dollars. There is no currency mismatch as the goods being financed trade in US dollars and the buyer pays in US dollars. Interestingly, in situations where the local currency in the borrower’s country of origin comes under pressure, the hard currency earned by a trade transaction becomes even more valuable. Local governments tend to make significant efforts to insure the performance of deals which bring hard currency into their country.

Further measures that can be applied to an investment portfolio include adopting limits on the weighted average maturity and effective duration of the portfolio.

Liquidity risk

The primary form of liquidity risk relating to a trade finance fund is the risk that a fund or account managed in accordance with the strategy will not have the ability to meet investor redemptions. There is generally little or no secondary market for structured trade finance deals and liquidation of existing deals prior to maturity can prove difficult and, if possible, costly.

Having said that, neither internal (i.e. investments by other Federated funds) nor external investors in Federated’s Project and Trade Finance investment strategy face lock-up provisions. All investors are, however, strongly advised about the relative illiquidity of the asset class and their investment, and internal investments are formally defined as illiquid and are held in the investing fund’s illiquidity allocation bucket, which typically range from 10 to 15 per cent of assets. While these measures do not guarantee that redemption requests will not come from either internal or external investors, they do help in ameliorating liquidity risk.

Given the illiquid nature of the assets, it may take an extended period of time to fund a liquidation or redemption request. For example, it may take up to 31 days to return cash to the investor. Trade finance assets held in the strategy’s portfolio typically make interest and principal payments either monthly or quarterly and are self-liquidating with an average maturity of 15 months. In addition, in the event of extreme market stress where it is impossible to sell assets, investors may receive investments held in the portfolio in-kind. As ever, the reality can be somewhat more favourable, and, for example, in the 3 years that the Project and Trade Finance investment strategy has been available to outside investors, investors have in fact been able to receive cash with little need to sell assets.

The second major operational risk relevant to trade finance deals is known as structure risk. Structure risk can be further broken down into counterparty risk, agent risk, legal risk, payment risk and damage/loss of goods and quality/quantity risks.

While some of these risks (e.g. counterparty risk) might appear to be more appropriately handled under other risk management efforts (e.g. credit risk) there are certain aspects of these risks that should properly be considered a form of operational risks. An example of this could be the reliability and timeliness of the information provided by the borrower on which the risk assessment is made and the ability to gather accurate information from the borrower to measure and manage the risk throughout the life of the deal.

Given the importance of the banks’ monitoring role in these transactions, an accurate assessment of counterparty risk, from an operational risk perspective, is highly valuable.

To manage agent risk, it is worth verifying that all the transactions have agency teams from top banks, which are also deemed to be reliable, and have extensive and appropriate experience and resources.

Legal risk is largely handled through the use of outside counsel and by careful selection of the controlling legal venue. For example, all deals for Federated’s Project and Trade Finance investment strategy are governed by ether US or UK law, which Federated feels affords an appropriate level of creditor rights as well as a stable means of exercising those rights.


With a global volume estimated at US$18 trillion in 2014, trade finance plays a critical role in international finance and in the domestic finance of both advanced and emerging economies. Trade finance is a significant business line for many banks and is an area of growing interest for non-bank financial players as well. Trade finance, critical and attractive as it is, however, is not for the unsophisticated or faint-hearted, especially in complex structured transactions. There are many risks faced by investors in trade finance that could seem quite daunting to the novice in this arena.

Disclaimer: This information does not constitute legal advice and is for education purposes only.  You should not rely on this opinion as an alternative to seeking legal advice.


Chart of the month - November 2016

Why do trade finance professionals need to worry about the price of oil?

Value of world trade vs WTI Crude average annual prices, 2000-2016

Source: Equant Analytics,

The drop in the value of trade in 2015 has gone largely unreported. Yet many trade finance practitioners will admit that last year was particularly tough. The chart tells us why. Between 2014 and 2015 there was a 15% drop in world trade values. This compares to the 23% drop in 2009.

Since 2000 the value of world trade has, largely, moved in a similar direction to the average price of WTI crude. The correlation between price movements and movements in trade monthly is over 90%. This is unsurprising since oil accounts for such a large proportion of world trade. If oil prices remain at their currently low level, the WTO forecast of 1.7% trade growth in 2016 and even the Equant Analytics forecast of 1% look over-optimistic.

Tuesday 1 November 2016


With the festive season only a couple of weeks away, all the ITFA Main Delegates have received the invite to the ITFA Christmas party which is taking place on Monday 5 December in London. We kindly ask all Main Delegates to RSVP by no later than 25 November 2016 (invite valid for a maximum of 5 delegates per member institution). We look forward to another celebration, and encourage ITFA members to attend this invaluable networking opportunity. May we kindly point out that this event is strictly for ITFA members and access to the event is restricted to confirmed guests only. We look forward to seeing most of you at the Christmas Party!

Also, following the success of last year's December event, the ITFA Insurance Committee is again pleased to host an Insurance presentation which will be held just before the ITFA Christmas Cocktail on Monday, 5 December 2016. The event will take place at Liberty Specialty Markets, 20 Fenchurch Street, Londond, EC3M 3AW, and addmission is at 3:30pm. Attendance is limited to three participants per ITFA member institution. Please register by sending an email by latest 25 November 2016.


We really wish to encourage our readers to be active on our Facebook page, to view photos of our events and to like and share our posts in order to provide more exposure to ITFA. Also, do not forget to follow ITFA on Twitter and LinkedIn.

May we take the opportunity to clarify that when accessing the ITFA Facebook page, individuals do not need to have access to Facebook in order to check our ITFA page, but simply need to like our Facebook page. 

Also bear in mind that even though access to Facebook is restricted in a number of institutions, one can always access it via a mobile device such as a smart phone in order to keep breast of event news and photos posted there. For example, we recently put up a post titled ''SERC Educational Seminar, Verona - 31 October 2016''. Read all about it in the next article of this Newsletter.


ITFA is very pleased to report another successful Educational Event, which was organised thanks to the revamped Southern European Regional Committee (SERC). A well-attended event which attracted individuals coming from Italy and France, representing ITFA members, as well as non-member entities.  

This Educational Event was held on Monday, 31 October, 2016 at the premises of Banco Popolare, at Piazza Nogara 2, Verona. Following the seminar, an enjoyable reception was held in an informal setting, together with a visit to the Roman Villa. The event was held in both English and Italian and provided a balanced mix of the two languages, so that everybody was able to catch the spirit.

The Educational Seminar started with an opening speech by Barbara Salazer, Manager Trade Finance of Banco Popolare, who emphasized that banks which normally look at one another as rivals were on this occasion, asked to share their knowledge and experience, creating a relaxed environment, having education as a prime and common objective. 

Silja Calac, ITFA Board Member (Head of Insurance Relations and Head of Treasury) and Senior Surety Underwriter at Swiss Re, delivered the first presentation, wherein she briefed the audience about our Association, who we are and our achievements. Silja mentioned the cooperation ITFA currently enjoys with associations like BAFT and ICC, and explained the ongoing collective efforts aimed, for instance at improving the MRPA. She also presented the achievements of the ITFA insurance committee and discussed other active topics and events concerning ITFA.

A second presentation delivered by Lorna Pillow - Senior Vice President, London Forfaiting Company Limited and ITFA Board Member (Head of Communication and Membership), entitled “Trade Finance and Risk Mitigation”, dealt with Trade Finance and touched upon a number of key definitions and articles from the URF800 as well as UCP600. In the second part of her presentation, Lorna addressed Risk Mitigation, discussing in further detail new Insurance Law, CRR, as well as BAFT Risk Participation Agreements.

A panel discussion conducted in Italian then ensued, with Lorna Pillow and Barbara Salazer as moderators, while experts from the top three banks in Italy (Vittorio Ballerio from Intesa Sanpaolo, Stefano Cesari from Unicredit and Roberto Ruffini from Banco Popolare) interacted with the audience. Ettore Santinelli, from UBIBanca contributed to the panel bringing the perspective of a Bank Credit department.

The greatest achievement was detected in the unconditional attention received by the speakers, the contributions and questions from the audience and a kind plea from the Italian smaller banks to make the occasion a periodic event, focussing every time on more specific aspects. The Insurance element attracted a lot of interest by the Italian banks.

Please visit the ITFA Facebook page to view photos of the event.